You probably know you can use your VA loan benefits to close on up to 4 units for 0% down. But did you know that the VA allows you to actually walk away from closing with a check in hand to pay down any existing debt you currently have? If you're thinking about investing using your VA loan benefits, read on to learn how you can take advantage of this little-known opportunity.
When I closed on my first deal, I got pretty lucky. Not necessarily in finding the deal – it was actually a pretty mediocre deal, maybe above average at best. But I got lucky in how I structured it. It was a FSBO and the seller had agreed to pay closing costs, so the contract was written to reflect seller concessions for an estimate of what those would be. While you can read about the exact numbers and my lessons learned here, the main takeaway is that the contracted seller concessions were greater than what my actual closing costs were, allowing me to receive the difference between the two to pay off my car loan and my monthly credit card bills.
While I did get fairly lucky at the time, now that I know exactly how the process works I've realized that I could have gotten a whole lot more out of the deal had I planned well from the beginning! So in the spirit of making my own mistakes so others can learn, I've come up with the following process so that anyone with VA loan benefits can use to optimize their deal and receive maximum cash back at closing.
Step 1: Establish Your Network
As with everything else in real estate and life, proper preparation and planning is the key to consistent success. Before you go looking for deals, you need to begin establishing stablish a relationship with as many mortgage brokers and lenders as you can. While having one go-to broker is great in most situations, one of the cornerstones of this strategy is facilitating broker competition, so you will need to build a relationship with at least two. Get prequalified and let them know you plan to have a place under contract in the near future.
Step 2: Maximize Seller Concessions
When you finally find a property you want to put an offer on, first calculate your maximum allowed seller concessions. The VA allows up to 4% of the purchase price in seller concessions, so when you submit your offer to the seller, ensure that you ask for the full 4%. While the VA states that seller concessions do not include "payment of the buyer's closing costs" or "payment of points as appropriate to the market," there are a few important items to note here.
How you word your request for concessions matters. If you only request 4% of the purchase price in seller concessions with no caveats, you can probably count on your buyer closing costs being paid from the seller concessions and you receiving what’s left over (i.e. less than 4%). However, because the buyer closing costs and reasonable discount point payment are not technically included in the 4% limit, you could try to write the contract so that the seller will pay both buyer closing costs and payment of a market-appropriate number of points and provide concessions of up to 4% of the closing cost. In reality the seller will probably be reluctant to provide this much in concessions, and I only point it out to show that it is theoretically possible.
If you want to truly maximize your cash back at closing, the best way to do it is by wrapping your VA funding fee up in the total loan amount. Having the seller agree to pay it for you is possible but it is not considered a closing cost and will come out of your 4% concessions.
If the seller rejects your request for 4% in seller concessions, try increasing your purchase price offer instead of reducing your request for concessions. For example, if the seller is willing to take a 200k offer on a home, instead of offering him 200k with $0 seller concessions, try offering 208k with $8k in seller concessions. In the end it's more or less the same for the seller, but it works out better at the closing table for you.
It's important to note here that the VA will not allow seller concessions to be taken strictly as cash to the buyer. The concession may, however, be applied to pay off any credit balances or judgements on behalf of the buyer, which means that any outstanding debt you have is fair game. So while you might not be able to walk away from closing with a large personal check in hand, being able to pay off your credit cards, car payments, or student loans is just as good.
Also, there’s no need for you to elaborate to the seller why you want to maximize concessions - chances are they aren't going to like the thought of paying off your personal bills with their concessions. They don't need to know your financial specifics and volunteering this information may hurt your chances of them accepting your offer with concessions.
Step 3: Minimize Closing Costs
Once the home is contracted, you'll want to work quickly with your mortgage brokers and lenders to get their fee sheets that approximate their closing costs and rates. Compare them and don't be afraid to ask them if they can do any better. When you get their best offers, take the best one and bring it to the others and ask if they can beat it. Depending on how competitive your brokers are, they may or may not be able to match or beat the other's offer. They may also try to continue to undercut each other by marginal amounts each time – after a certain point there’s no sense string them out too long trying to squeeze blood from a stone. Once you get something that works for you, make up your mind and go for it.
If you follow this process, you should have a property under contract with concessions that are significantly higher than your closing cost estimates, the difference of which will be disbursed against your existing debts at closing.
For other ways to maximize cash back at closing, consider the day of the month you schedule closing. If you are purchasing a small multifamily where some of the units are already rented, try to close at the beginning of the month. This will ensure you receive both prorated rents for the entire month and also give you the longest amount of time before your first mortgage payment, increasing your short term returns considerably.
Lastly, before rushing in trying to maximize your payout at closing, carefully consider the situation to determine if it's the right strategy for you. While it might feel like you're getting something for free, all this process is really doing is offering short term cash at the expense of increasing your mortgage by a proportionate amount. It is very possible to over-lever and put yourself immediately underwater on your property using this strategy, especially if you wrap your funding fee up into your mortgage. By increasing your overall mortgage amount you also will be increasing your monthly payments which will have a negative effect on your cash flow. While none of this is necessarily bad, it's important to understand the risks you are taking on by utilizing your VA loan in this way and weigh them against the value of having any existing debt paid down at closing.
Are you a Veteran investor who has taken advantage of this benefit? Do you practice any other strategies to maximize cash back at closing? Let's hear about it!
Hi @Brendan M.
Thanks for this explanation. I read through this and have not looked at the link yet.
Why wrap the closing costs into the purchase since it's going to increase what the payments will be? How does this help with the concessions - as in your example of the 200k/0 verses the 208k/8k.
Interesting ideas on how to use the loan to your advantage. I guess if the numbers would support the increase in the Mortage payment amount this could be a win for the short term and long term.
I will remember this once I get ready to use my VA Loan.
@Daria B. It's really up to personal preference, your strategy, and your level of risk you are comfortable assuming with the property. This strategy isn't a magic way to generate free cash where there was none before. It is, however, a great way to free up cash at closing on your property that you can use to pay down higher interest debt that may be plaguing you.
For example, let's say you have accrued some credit card debt, and you're paying $600/month in high interest debt, to the tune of 8k total owed. This allows you to wipe out that debt by essentially consolidating it into a lower-interest mortgage. A quick calculation shows that 8k amortized over 30 years only results in an extra $38/mo in payments. If you're currently paying $600/mo, you have therefore increased your cash flow by $562/mo for the short term (i.e. however long it would take you to pay off your debt at the old rate), and decreased your annual interest on it (now at mortgage rates vs. credit card rates).
I see, your wrapping of the costs into the purchase frees up on the end of the concession that is paid directly to the outstanding debt. Since you did this I take it that the VA has some written guidance on this and "they" pay the debt you specify?
True, since the increase on the mortgage side means the property should still cash flow this could be a method to use so no costs are paid at closing.
Thanks for further explanation.
Ya this is a really cool unique VA thing. Everyone knows you can pay off other debts on a refi, but with VA you can do it on a purchase.
Basically any debt at a higher rate than your mortgage is a good target. Car loans, credit cards, etc. I nuked my wife's student loan debt.
@Nick Doria - It allowed me to build up cash much faster for my contingency fund and much more rapidly enable my second acquisition. The best way for the numbers to support this is to find a quality deal where you can wrap the funding fee into the mortgage and still end up with instant equity in the home (due to buying below market value).
I bought my first home just about right at market value and I put myself $5k underwater on it immediately because of that. However, because I was able to wipe out my existing high interest debts and rents in the area have been on the rise, this ended up being a worthwhile tradeoff. But if I had to do it again, I would definitely look for a discounted property to ensure maximum risk mitigation.
@Daria B. - The VA has clear guidance about what is and is not a seller concession and the limits thereof (4%), and also clearly states what fees the borrower can and cannot pay at closing. In a normal scenario, the seller concessions would therefore be applied against the buyer's outstanding balance due at closing, and any remaining difference is still entitled to the buyer which may be applied against outstanding debts (specified in advance of closing, and clearly itemized on the HUD-1).
It is my understanding that if you do not have enough outstanding debts to fully apply this difference against, then the remaining balance will either revert back to the seller or may possibly be allocated to one of the other closing parties (lender, agent, etc) if itemized in advance.
> It is my understanding that if you do not have enough outstanding debts to fully apply this difference against, then the remaining balance will either revert back to the seller or may possibly be allocated to one of the other closing parties (lender, agent, etc) if itemized in advance.
Lower the sales price, decrease the seller credit. Net for seller will be the same so they will not care, and you will get the extra money back when you sell. :)
I usually tell my realtor partners that their job is to negotiate the dollar amount, my job is to figure out how to structure it and tell them what to write in the contract addendum. Making math make sense to realtors is generally a failing enterprise.
@Chris Mason - Great idea, and a great way to solve the problem with no impact to the seller. How close to closing would you typically be able to adjust the sales price like that without causing issues/delays with the lender?
Originally posted by @Brendan M. :
@Chris M. - Great idea, and a great way to solve the problem with no impact to the seller. How close to closing would you typically be able to adjust the sales price like that without causing issues/delays with the lender?
Realistically, give me a week from when you sign the contract addendum and email it to me. The new disclosure rules that went into affect in October don't help.
@Brendan Morin What if your loan exceeds the 417 limit? The home I am looking at does, so can the leftover from the 4% in concessions be applied to down payment?
Yes theoretically it should be able to be used but check with your lender to be sure for your specific circumstance.